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The following segment was excerpted from this fund letter.
Cadre Holdings (NYSE:CDRE)
Cadre is another recent addition. We became familiar with the company in December, but were unable to build much of a position as the stock ran up. The company recently issued equity in a secondary offering that was poorly received, and the price declined to where it was when we first discovered it. We were able to take advantage of the sell off and purchase shares. Patience can pay off.
This is a scenario where we are betting on the jockey to build a compounder. In 1996 Warren Kanders bought a tiny body armor company in Florida that was generating $11M in revenue. This was the seed of Armor Holdings, which eventually went public and was sold to BAE Systems in 2007 for $4.5B. In 2012 BAE sold back to Kanders the body armor and holster business. Kanders has been building the business, which is now called Cadre Holdings, and he took the company public in August of 2021. Kanders is the Chairman and CEO. He still owns almost 50% of the stock.
The company operates mostly in 3 different segments which are Body Armor, Duty Gear, and Explosive Ordinance Disposal. CDRE’s products are considered to be mission critical and over 80% of products are tied to refresh cycles of 7 to 10 years. The Body Armor business sells body armor to law enforcement agencies. The key brands are Safariland and Protech Tactical. They have a 40% share of the US market. Their primary competitor is Point Blank. CDRE tends to avoid selling body armor to the military because the margins there are lower. Law enforcement margins tend to be higher because the body armor must be fitted and sized.
The Duty Gear business sells safety holsters and other items to law enforcement and other US federal agencies. The company believes they have a 90% market share of US law enforcement safety holsters. The EOD segment sells explosive ordnance equipment, which are basically bomb detection suits similar to the ones in the movie The Hurt Locker. These suits and equipment are sold to law enforcement and military organizations. They have an 85% share of the global developed market.
Regarding their customers, they sell at least one product to each of the top 50 law enforcement departments in the US. US state and local law enforcement and other organizations such as department of corrections and fishing and wildlife enforcement account for 57% of sales. International defense and law enforcement account for 17% of sales. US Federal Agencies such as DHS, DoI and all 4 military branches represent 16% of sales. Commercial customers represent 10% of sales.
US police expenditures and major law enforcement budgets generally increase at 2% to 3% per year. They are not cyclical and have not declined in prior recessions. The American Rescue Plan provides $350B to hire more police. The ‘defund the police’ movement is backfiring as evidenced by the recent recall of Chesa Boudin in San Francisco. Military budgets in Europe are going up and are likely to go up in the US as well.
As a call option, they are working with the military on a blast sensor for soldiers to help treat traumatic brain injuries. The sensors would likely be worn by all Special Forces soldiers. It’s possible that the program could be expanded to soldiers outside of Special Forces too. CDRE has a blast sensor product that is sold through the EOD business. They are working on a different sensor for the military. They and one other company are competing for the award. Phase I has been completed. Phase 2 should be completed soon. It is likely that a winner will be announced in 2023.
The company generates a significant amount of free cash flow, and the goal is to use that free cash flow to make acquisitions that will expand their market share internationally or allow them to buy companies with adjacent products. They are looking to buy companies that have a leading market position, a high cost of substitution, defensible technology, don’t compete with large companies, operate in a niche, have a strong brand, are mission critical, have a recurring revenue model, and are asset light
The goal is to grow revenues by 3% to 5% organically per year (2% to 3% volume and 1% price) and to make 2 to 4 acquisitions per year, which would equate to double digit EBITDA growth. The President, Brad Williams, and the CFO, Blaine Browers run the company on a daily basis. They are both from Idex Corp (IEX), which is considered one of the best managed Industrial companies. There are also 5 other ex IEX employees on the management team. They have instituted the IEX culture into CDRE.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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